Hertz's Strategic Shift: Reducing Electric Vehicle Fleet to Optimize Profitability and Balance Demand
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Hertz Global Holdings (HTZ), one of the largest car rental companies, announced its plan to sell approximately 20,000 electric vehicles (EVs) from its US fleet, which accounts for about one-third of the global EV fleet. The company initiated this decision in December 2023, and the sales process is expected to take place in 2024. Hertz aims to balance supply and demand of EVs, reduce lower-margin rentals, and mitigate damage expenses associated with EVs.
The company's revenue for the fourth quarter of 2023 is expected to be within the range of $2.1 billion to $2.2 billion, in line with historical seasonality relative to the third quarter. However, Adjusted Corporate EBITDA for the fourth quarter of 2023 will be negatively impacted by the incremental net depreciation expense associated with the EV sales plan and higher depreciation expenses in the ordinary course due to residual values for vehicles generally falling throughout the quarter more than previously expected.
The sale of the EV fleet will result in a non-cash charge of approximately $245 million, representing the write-down of the EVs' carrying values as of December 31, 2023, to their fair values. Hertz expects this action to improve its adjusted corporate EBITDA across 2024 and 2025, with an aggregate benefit equivalent to the incremental net depreciation expense recognized in Q4 2023. Additionally, the company anticipates generating incremental free cash flow of approximately $250 million to $300 million over the two-year period.
The decision by Hertz to reduce its EV fleet reflects the challenges faced by the EV industry, including a slowdown in growth rate, and falling expectations. Major carmakers like General Motors and Ford have also scaled back their production plans for EVs. Analysts, such as Morgan Stanley's Adam Jonas, view Hertz's move as a warning for the entire EV space, suggesting that expectations for the market need to be adjusted downward.
Hertz had previously announced plans to order 100,000 Tesla vehicles by the end of 2022 and to purchase up to 65,000 units from Polestar over five years. However, the high expenses related to collision and damage, primarily associated with EVs, have contributed to the decision to reduce the EV fleet. Hertz's experience aligns with those of other rental car companies, like Sixt, which has halted Tesla purchases and is selling its existing fleet of Teslas.
The market for used EVs has experienced a decline in prices due to the decrease in new EV prices and the rise in unsold EV inventories. Cox Automotive data indicates that wholesale used EV prices fell throughout 2023, and it is expected that used EV prices will continue to decline more than overall used vehicle prices in 2024. As Hertz sells its EVs, it is likely to face significant losses, contributing to the trend of falling used EV values.
Despite this setback, Hertz remains committed to improving the profitability of its remaining EV fleet. The company plans to focus on initiatives such as expanding EV charging infrastructure, fostering relationships with EV manufacturers, and implementing policies and educational tools to enhance the EV experience for customers.
Shares of EV makers TSLA (-3.18%), RIVN (-0.6%), and FSR (-2.69%) were under pressure in early trade but have been able to climb back intraday. The sale by HTZ will keep investors cautious on the EV space as we await Q4 earnings. There will be a close focus on average selling price and margins.
In conclusion, Hertz's decision to sell a significant portion of its EV fleet reflects the challenges faced by the EV industry and the need to balance supply and demand. The sale is expected to improve the company's financial performance over the next two years, although it will result in a non-cash charge. The decreasing prices of used EVs and the cautionary signals from analysts indicate the need for a reset of expectations for the EV market as a whole. Despite these headwinds, Hertz remains committed to its EV strategy and aims to enhance profitability for its remaining EV fleet.